Some financial questions are more complex than they first appear, and this is one of them.  Perhaps the question you need to ask isn’t “Are you subject to rollover IRA/Roth IRA contribution limits?” but rather, “Should you implement your own IRA/Roth IRA contribution limits?”
To answer the question as stated, the answer is no – there’s no limit on the amount of qualified retirement funds that you can rollover from a traditional IRA into a Roth account.  Once the Roth IRA is established, however, you won’t be able to contribute more than the IRS specified limit ($5,000 for the 2010 tax year; indexed to inflation every year thereafter), regardless of the type of IRA you select.  For example, if you deposit $3,000 into your traditional IRA, you can only contribute the remaining $2,000 to your Roth IRA.
But let’s take a look at the second question, as there may be a reason to implement your own contribution limits – even if the government doesn’t.  The crucial thing to remember about a Roth IRA rollover is that when money is moved into a Roth IRA from a traditional, tax-deferred retirement account, you will be required to pay ordinary income taxes on the money being rolled over.
This is why it may make sense to limit your Roth IRA contributions.  Because the money coming out of your traditional IRA will count as income, rolling over a sufficiently high amount of money could put you into a higher tax bracket when April 15th rolls around the next year.  If, for example, you’re in a 15 percent tax bracket, the additional income from your Roth IRA rollover could push you into a 25 percent tax bracket.  In this case, the government will then take a bigger bite out of all of your income for that year, which could potentially leave you owing money at tax time.
For this reason, it might make better financial sense for you to complete many partial rollovers over several successive years in order to maintain your lower tax bracket than to complete a single rollover during one tax year.  Need to know if the savings are worth the extra hassle?  Sit down with the IRS tax tables and do the math yourself or – better yet – talk with your tax accountant or financial planner.  These professionals can help you determine the best way to complete your Roth IRA rollover.
So although the government doesn’t place a limit on how much money you can transfer between accounts with a Roth IRA rollover, it may still be to your advantage to place personal limits on the amount you move in one year – especially if that money is coming from your traditional IRA.  If you’re considering a Roth IRA rollover and don’t yet have a tax accountant or financial planner, this may just be the perfect time to find one.  Not only can these professionals help you with this financial transaction, they can help you develop a comprehensive financial strategy for all of your retirement savings needs as well.

Not only are you permitted to rollover a qualified IRA plan distribution to another plan or to a traditional IRA, but you may also rollover the distribution to a Roth IRA. If you choose this option, however, you are technically converting the rollover IRA assets to a Roth IRA and all of the usual rules for Roth IRA conversions will apply. Specifically, you must be eligible to make the conversion in the first place. If you are, then you must pay income tax on all the pre-tax money that is transferred out of your employer’s plan into your Roth IRA. And you must pay it in the year of the conversion. There is one exception to this rule for conversion that takes place in the year 2010. You are permitted to spread the income from the IRA conversion over two years, beginning in 2011 (half in 2011 half in 2012). For conversions after 2010, however, all of the income from the rollover IRA conversion must be included on the tax return for year of conversion.

Who is Eligible?

For the year 2009, you are eligible to convert rollover IRA to a Roth IRA. If your modified AGI is $100,000 or less, and if you are married, you must file a joint return with spouse. (In other words, those who are married filling separately do not qualify to convert rollover IRA plan assets to a Roth IRA.) Beginning in 2010, everyone qualifies to converting rollover IRA to a Roth IRA.

Which Distributions Are Eligible?

As is the case with rollovers to other plans to traditional IRAs, all distributions and partial distributions from qualified IRA plans and qualified annuities are eligible to be rolled over to a Roth IRA, with the exception of required distributions and annuities or periodic payments that last for ten years or more.

Advantages and Disadvantages

Once you make the decision to roll over your employer’s plan into an IRA, the next question you must ask yourself is traditional IRA or Roth IRA? The decision involves a variety of factors. The beneficiary must first qualify to convert rollover IRA assets to a Roth IRA, the transfer from a qualified plan to a new Roth IRA must occur as a trustee-to-trustee transfer. The disadvantage of converting rollover IRA to a Roth IRA is that you must pay tax on the entire amount of the distribution right away.

The difference between your rollover IRA or Roth IRA is that instead of a tax deduction for your contribution, you get tax-free distributions later. It’s important to understand that if your tax rate stays the same, it doesn’t make a penny’s difference to your retirement income picture whether you use a traditional or Roth IRA rollover. Your net or after-tax income on withdrawals will be the same in either case.

If your tax rate goes up when you distribute your IRA rollover account later after retirement, you will be happy. Many believe that the current low tax rate is not sustainable—at least you wouldn’t want to be the farm that it is. Having an IRA rollover account for at least part of your retirement investments plan, hedges against possible tax increases later.

Another great use for a Roth IRA rollover is for young people who haven’t reached their full income potential. At low income tax rates, the value of the tax deduction given up by using a Roth IRA is negligible. Later, when they withdraw the funds tax-free that would have otherwise been taxed at a high rate, they will receive substantial tax benefits. In essence, they would have leveraged the tax code by the amount of the difference in their contribution and withdrawal tax rates. That’s very powerful. For instance, if you are in a 15% tax bracket now, the value of a $1,000 tax deduction is only $150. Let’s say that over time, your Roth IRA grows to $5,000. If you forgo the tax deduction and opt for the Roth IRA, when you take it out after retirement, you keep the entire $5,000 no matter how high your current tax bracket. If you had taken advantage of the Regular rollover IRA’s tax benefits, you would have saved $150, but you would be faced with tax on the entire $5,000 when you withdraw it. So the amount in your hands after tax would be far less.

Roth IRAs offer some benefits for your estate. In essence, you have prepaid the income tax on the entire amount for your heirs. The ability to stretch the tax-free distributions across at least two generations is very powerful. Additionally, there are no forced withdrawals at age 59.5. These advantages may or may not be an important issue for you, but it’s an added benefits.

Contributions of Rollover IRA to a Roth IRA can always be withdrawn tax free. But, the earnings must remain in the account until the account holder reaches age 59.5, or five years after deposit—whichever is later—to receive tax-free treatment.

The ability to withdraw contributions tax-free makes them a great way to accomplish multiple goals in a tax-preferred manner. Suppose, for example, after a number of years of contributions, you withdrew those contributions to fund your daughter’s college education while leaving the earnings to compound tax-free for your later retirement.

For a withdrawal from a Roth IRA to be considered qualified, meaning that you avoid taxes and penalties on the withdrawal, you must meet certain conditions.  A five-year aging requirement is imposed by the IRS, and you must meet one of three additional conditions – you must be at least 59 ½ years old, you must be making a first time home purchase, or there must be a disability or death to you or a dependent.  If you fail to meet these qualifications, taxes must be paid on the earnings withdrawn, in addition to a 10 percent additional tax penalty unless you qualify for an exception according to IRS rules.

While traditional IRAs require you to receive required minimum distributions (RMDs) beginning at age 70 ½, there’s no such requirement with Roth IRAs, except for Roth 401k plans.  As with a traditional IRA, you must begin receiving RMDs from a Roth 401k at age 70 ½ years.  As an additional precaution, be aware that contributions to a Roth 401k IRA cannot be moved to a regular 401k account, as you can’t “un-pay” taxes on the funds in your Roth account.

To continue to reap the benefits of your Roth IRA, consider carefully where and how any withdrawals will be used before they’re removed from your account.  As noted above, there are certain taxes and fees involved with a withdrawal which may make a rollover more advantageous.

Because of the nature of the funds in a Roth IRA, they can only be rolled over into another Roth IRA.  Generally, you would only move funds from one Roth IRA to another Roth IRA if the second offered you some advantage, such as increased earning potential, more control over your money or the ability to consolidate accounts under one provider or adviser, for example.

The rules surrounding Roth IRAs are a little different and a little more complex than traditional IRAs, especially with the legal changes that take effect in the 2010 tax year.  With this knowledge, you may want to consult a tax adviser or your financial planner before you make any decisions about moving money from one Roth IRA to another, or before you consider making a withdrawal.  There may be good reasons for either transaction, but you should confirm your decision with someone better versed in Roth IRA rules before you make decisions that could impact your future and that of your family.

Recently, though, the standards for Roth IRA conversion eligibility have changed.  Starting in 2010, there are no longer any income restrictions on those who are seeking a conversion.  If you have money in a traditional IRA, you can convert it into a Roth IRA, regardless of your household income.  Keep in mind, though, that these limits only apply to Roth IRA conversions – if your income is above certain guidelines, you won’t be able to contribute any additional funds to the account.

If you qualify for the Roth IRA rollover, you can distribute the entire balance of your traditional IRAs into the account without a problem.  The only thing that you’ll need to do is to ensure that you have the appropriate amount of taxes deducted from the IRA to cover your IRS needs – or enough funds on hand to pay your tax bill if you choose to convert the entire amount without withholding any money for taxes up front.

Of course, you might be wondering why anyone would want to open a Roth IRA if they’re just going to have to pay taxes on the amount that they transfer in.  The answer is that, since you don’t have to pay taxes again when the money is withdrawn, all of the earnings that come from a Roth IRA account are tax free.  For those who are worried that taxes are going to increase in the future, a Roth IRA rollover will allow them to invest with less stress.

To protect your 401k rollover to Roth IRA from unnecessary penalties, you’ll most likely want to go with a direct transfer to move your money between accounts.  This is a type of transfer that’s arranged directly between the banks, so that you never see a check for the balance of your account funds.  Doing it this way – instead of through an indirect transfer – will help to ensure that the proper amount for taxes will be withheld and that you won’t end up owing additional funds at the end of the year when you file your taxes.

So, if you’re interested in a Roth IRA distribution from your traditional IRA account and you meet the requirements described above, you should go to your financial advisor or your bank and set up a Roth IRA account.  After this is done, you can then have the bank complete the Roth IRA conversion from your existing account.  If you like, you can even ask them to withhold additional taxes, just to make sure that you’re adequately covered when it comes to taxes and the IRS.

Because of the tax dynamics involved, you can’t really do a Roth IRA/Traditional IRA rollover.  This is because when money is removed from a Roth IRA account it is not taxed since taxes were already taken out before the money was put into the account.  However, in a Traditional IRA account the money is taxed when it is removed because taxes were not withheld before money was put into the IRA.  This means that if you do a Roth IRA transfer to a Traditional IRA, then you will have to pay taxes on it again when it is withdrawn, and this is an unnecessary waste of money.

Something else to consider if you are doing a Roth IRA rollover is whether you are going to go through with an indirect or direct transfer.  In most scenarios you would want to go with the direct transfer, and this is probably also the case with the Roth IRA conversion.  When you do a direct transfer the money is moved between banking institutions and you do not have to worry about the handling of the money or the taxes because they are taken care of by the banks.  This will help to ensure that when you are converting to a Roth IRA from a Traditional IRA that the appropriate amount of taxes are withheld so that you do not end up with problems later.

In an indirect transfer the money from your existing IRA account is issued to you in the form of a check.  However, twenty percent of the total is withheld for taxes.  You then have sixty days to move the money into a qualifying account.  During this time you will want to open a Roth IRA account and make sure that you deposit the total check.  Then, the twenty percent is released for taxes, and if necessary additional taxes will be taken out of the Roth IRA to pay for the conversion.  This is a complicated and troubling process, and it can end up causing you a lot more stress than it would to just let the banks deal with it.  The upside is that it does allow you more of a hands-on approach.

If you are looking to make sure that your Roth IRA conversion goes well, you just have to follow a few simple rules and you can easily make a transfer from a Traditional IRA to a Roth IRA.

Prior to 2010, your ability to convert funds to a Roth IRA was restricted by many things, including your tax filing status.  If you were married but filing separately, for example, you had to be separated from your spouse for an entire year in order to be eligible.  Now, however, there’s no longer a rule prohibiting people who are married but filing separately from converting their accounts.  If you have recently divorced or are in the process of filing for divorce, it makes sense to talk to a financial planner about saving for your retirement, as well as providing for any children or beneficiaries you may have.

Your adjusted gross income was also a factor in Roth IRA conversions before 2010; you weren’t eligible for a conversion if your modified adjusted gross income was more than $100,000.  As of 2010, this income limit no longer applies.  However, bear in mind that this repealed restriction applies only to Roth IRA conversions – traditional income restrictions still apply to future contributions made to Roth accounts.

In addition, while the IRS used to place limitations on the types of IRAs that could be converted into Roth IRAs, this has now changed – with a few exceptions.  A Simple IRA can be converted to a Roth IRA after you’ve been a participant in the Simple IRA for a minimum of two years, while designated Roth IRAs still cannot be converted to Roth IRAs.  Besides these two distinctions, your IRA should be eligible for rollover and/or conversion to a Roth IRA.

The most important thing to keep in mind when you’re considering a rollover IRA/Roth IRA conversion is taxes.  You see, the money in your IRA is money you’ve earned – either as income or interest – but that you haven’t yet paid any federal or state income tax.  Money in a Roth IRA, on the other hand, is money that has already been taxed.  This means that if you rollover your IRA into a Roth IRA or convert your IRA to a Roth IRA, you’ll have to pay taxes on the portion converted.

The fact that you’ll owe taxes if you rollover or convert your money to a Roth IRA was previously seen as a disadvantage by those who would otherwise be ideal candidates for Roth accounts.   However, many participants are beginning to seeing the advantage of paying taxes now, in anticipation of tax rate increases later in life.  There’s also the advantage of paying taxes now, rather than leaving that burden for the inheritors of your estate.  Your tax accountant or financial planner can help you to understand the tax implications of an IRA rollover/Roth conversion and to decide if it makes good financial sense for you.

In fact, any time you’re considering a Roth IRA rollover, it makes sense to meet with your tax accountant and financial planner and review your financial goals, particularly because IRA rollover questions usually arise when you’re changing jobs.  Any time you make a major financial change, it’s a good time to step back and reassess your retirement savings goals.

Because of this difference in how taxes are applied to the two types of IRA accounts, you’ll need to be prepared to pay taxes on the amount that you’re moving over if you’re contemplating a Roth IRA conversion.  This can be a confusing task, so to be sure that the IRA to Roth IRA conversion goes well; you’ll probably want to perform a direct transfer so that the bank is responsible for managing the withdrawal of the taxes.  If you’re confused by this, don’t be – it is important that you understand the difference between the two types of transfers so that you can choose the best option for your needs.

The direct transfer mentioned above is a type of transfer that occurs completely between banks.  With this type of Roth IRA conversion, you’ll need to establish the new Roth IRA account, but beyond this, the bank will initiate the transfer of money from your existing account into the new account and will take care of any taxes that need to be reported to the IRS.

The other type of 401k Roth IRA conversion is known as an indirect transfer, and it works a little differently.  In this case, the existing IRA account is closed and a check is issued to you for only 80% of the total balance (the other 20% is withheld for tax purposes).  You then have 60 days total to open the new Roth IRA and deposit the money.  In most cases, the 20% would then be released into the new IRA, but with a Roth IRA conversion, the rules are a little different, which can lead to confusion.

Because of this confusion, many people opt to not complete a Roth IRA transfer from their existing IRA, but rather opt to roll the IRA into another traditional IRA and then open up a separate Roth IRA account to receive new contributions.  This is a possibility, and it can alleviate some of the stress involved with Roth IRA taxes.  This way, the money that you’ve already have set aside in a tax-deferred account is left alone, and you’re free to make future deposits into the Roth IRA account.  Whichever way you choose to go, you’ll need to make sure that the taxes are handled properly, as mistakes here could cause problems later on.

When you hear the phrase “tax law changes,” you probably aren’t expecting good news.  However, if you’re considering a rollover IRA/Roth IRA conversion, these tax law changes may actually be to your advantage.

One of the biggest tax law changes in 2010, as far as traditional IRA/Roth IRA rollovers and conversions are concerned, is the ability to pay any Roth IRA tax incurred in 2010 during the conversion process in two parts.  To take advantage of this benefit, you report half of the amount converted during 2011 and pay taxes on it in that year, and then report the remaining half of the account balance during the 2012 tax year.  Spreading out the taxes over two years certainly helps to lessen the Roth IRA tax burden you’ll incur during the rollover/conversion process.

If for some reason the trustee of your current IRA is unable to perform a Roth IRA transfer, then the funds will have to be issued to you.  If this happens to you, understand that you have a limited amount of time to get that money into the target Roth IRA (typically 60 days, according to IRS statutes).  Fail to do so – even by one day – and the IRS will assume that you’ve simply withdrawn your money and will stick you with a variety of taxes and penalties.  For this reason, it’s a good idea to inquire about a direct rollover with both your current IRA trustee and your target Roth IRA trustee to make sure that this type of transaction can occur.

Here’s another tax consideration to make if you’re contemplating an IRA/Roth IRA conversion or rollover – where will you get the money to pay the taxes that are due?  Ideally, you’ll want to avoid using the money from your IRA to pay the taxes due, as this lessens the amount of money you have to invest.  Remember, you’re counting on these funds to grow over time to support you once you reach retirement age.

However, does it make sense for you to use money from your savings?  Will the money you lose in interest income by reducing the amount of your savings be offset by the gains of your money in the Roth IRA?  This is a question that deserves careful consideration.  Your tax accountant or financial adviser can help you put pencil to paper and come up with a real picture of just how much money is involved and how these decisions will impact your financial outlook, both in the short term and in the long term.

The main characteristic that sets Roth IRAs apart from other IRAs is that Roth IRAs are funded with income upon which you’ve already paid federal and state income tax.  Conversely, most IRAs are funded with income upon which you haven’t yet paid federal or state income tax.  This means that when you rollover to or convert to a Roth IRA, you will be expected to pay income tax on those funds.

The question of how much tax you’ll owe depends on a number of factors, including how much money is involved and what your current tax bracket is.  Bear in mind also that you aren’t required to convert the entire balance of your traditional IRA to a Roth IRA at once – you can convert as much or as little as you choose at a time.  If you have further questions about these requirements, check out the IRS website for more information or, better yet, speak with your personal financial adviser or tax accountant.  He or she can help you to determine exactly how much tax you’ll be required to pay.

Another legal change that takes place in the year 2010 is when the Roth IRA taxes you owe will be due.  If you roll over to or convert to a Roth IRA in 2010, you’ll pay half of the taxes due in 2011 and the remaining half in 2012.  This allows you to spread out the tax burden, which could be a real bonus if you’re considering rolling over or converting a significant amount of money.  Again, your personal financial adviser or tax accountant can help you determine not only exactly how much tax you’ll be required to pay, but also how that will affect your taxes for the years 2010, 2011 and 2012.

Another bit of good news – if you choose to rollover your IRA to a Roth IRA or convert your funds to a Roth IRA, you’ll probably avoid the mandatory withholding and/or penalties that you would have incurred had you chosen to just cash out your IRA.  If you do decide to cash out your IRA instead of performing a Roth IRA conversion, you’ll also lose out on the benefit of deferring the tax burden and spreading it out over two years.

As you can see, rolling your IRA over to a Roth account or converting your funds to a Roth IRA isn’t without its tax consequences.  However, those tax consequences are less of a burden now than they’ve been in years past, making it a perfect time to consider this change in your retirement savings strategy.  Paying the required taxes now, during your rollover or conversion, may also play an important role in your estate planning, as it will minimize the necessary taxes for those who receive any funds in the Roth IRA from your estate later in life.